five-step planning process

Businesses typically develop budgets using a five-step planning process. The first step is creation of the strategic plan where long-term goals are established (along with a plan to achieve) and includes a financial projection for the next five years. Second, a more detailed financial plan is outlined which proves an outlook for the first year on a month-by-month basis. Third, because circumstances can change so rapidly in the first year of strategic plan implementation, the first-year financial plan is revisited monthly and adjusted in order to take unforeseen changes into consideration. The fourth step is to make informal forecasts throughout the year, such as predicting full-year sales at mid-year. The last step is for the company to produce their business plans, including detailed financial projections, that can be used to apply for additional capital, if necessary (Finney & Meigs, n.d.).

From this information, I gathered that is it important to project the first year on a monthly, rather than on a quarterly basis, because the risk of unforeseen circumstances in the first year of operating (or implementation of a new strategic plan) is high. Actuals should be consistently compared to the plan to determine if the plan is off-course, what risk the short-term gap has created for the full-year plan, and if changes are needed in the strategic plan to course correct. After the first year, there should be enough historical actuals to create more accurate forecasts that can be done on a quarterly basis.

Reference

Finney, R. G. & Meigs, R. F. (n.d.). Budgeting. Reference for Business. Retrieved from https://www.referenceforbusiness.com/encyclopedia/Bre-Cap/Budgeting.html

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